When I have excess money I wouldn’t think of taking a loan which is much smaller than my savings. Why does a sovereign state issue sovereign bonds to borrow tens of billions dollars when it has in reserve over half a trillion dolars?
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You can’t compare monetarily sovereign states to households, their finances are in no way the same.
So a country issues bonds to remove currency from circulation, the other method of doing that is levying taxes.
Currency reserves are an asset that can allow the state to buy things that are not for sale in their own currency.
For example, if I want to buy a ship made by a Chinese company they may insist on being paid in Yen and not £s, in which case I need to have Yen in order to buy that item.
The state has both currency reserves and sovereign debt for the same reason most of us have an “emergency fund” and credit card debt simultaneously.
The liquidity is nice to have.
At least that is my take on it!
The four obvious reasons are
1) Building credit. Having loans and consistently paying them off shows that you are a “good risk” for future loans and can secure preferred rates and terms. Just a you or I would use a credit card when we have $100 in the bank.
2) Opportunity cost & Liquidity – Sure I might have $100 in the bank right now, but I might *really really* need it tomorrow. I can take out a loan to keep my liquid cash just in case something unforeseen happens. Maybe I can invest the $100 and get a greater return on the investment than the interest in the loan. The same way rich people take out loans despite being flush with case.
3) International Relationships – It builds relationships with foreign countries. Short answer, there is something called the Benjamin Franklin affect which is when you *like someone* you do favors for. Benjamin Franklin would famous never bring a pencil to meetings and would ask someone in the room to lend him a pencil. It’s weird, but he noticed people who lent him pencils in the past *liked and trusted* him more in the future. By having a loan with a foreign power, you actually build trust and relationships with that nation.
4) Politics. The amount of money you keep in reserves might be legally locked, like in order to spend $x from a treasure you need senate approval or a special law passed because the law says you *must keep $y* in the treasure at all times. Similar laws are looser or non-existent for taking on certain forms of debt. Long story short, it’s easier to ask for forgiveness than permission in some cases.
I have both a mortgage and emergency savings. Sure I could use my emergency savings to pay down my mortgage, but there’s a lot of value in having liquidity available and I can’t easily increase my mortgage balance if I have a surprise expense one month.
States are similar, they have both long term things (like building infrastructure that will produce returns and hopefully generate more taxes over decades) as well as short term swings in revenues and costs (many states collect income taxes once a year for example).
First off, people absolutely carry debt when they have savings—somebody might have $100k in the stock market earning 8% while they have a $40k car loan at 1.9%. Not only are they earning more than they’re paying, it helps with keeping a pile of assets for a “rainy day” like major home repair.
Not all loans allow early repayment, so even if they wanted to use their cash to pay off their debt, they couldn’t. Not to mention that they need some cash for liquidity purposes short term
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